Initiated back in 2009 - right after the market crash in the year before - Tax Free Saving Account (TFSA) constitutes the macroeconomic policy of the Canadian government in an attempt to encourage savings, and fortunately, it has paid off. Each year, more Canadian citizens, as well as residents, opt to capitalize on TFSA and put their money in tax-free investment. However, deemed also as a benefit, TFSA has its contribution limits, which vary between individuals.
Counting from the year in which TFSA was implemented, each year, the Canadian government designated a certain amount as the contribution room that varies between years. Your contribution limit is the total contribution room starting from the year you became an adult resident of Canada. That is, you do not need to be a citizen to be able to contribute to your TFSA; On the contrary, even with a Canadian passport, if you are deemed a non-resident, you have no contribution room for the same calendar year.
Following his immigration to Canada at age 38, Kevin has become a Canadian resident since 2018. His contribution limit by 2021 is: 5,500+6,000x3=23,500.
In other words, he can put away a total of CAD 23,500 after tax into his TFSA. All the profits generated by the total amount will be tax free when he takes them out.
Abby first arrived in Canada as an international student in 2016; however, since she was still a minor, she wasn’t entitled to TFSA contributions. In 2018, after she turned 18, she became eligible for making TFSA contributions, and her limit by 2021 is: 5,500+6,000x3=23,500.
Among all the many possible causes, negligence is the most common. Speaking from our experience with clients, most people over contribute to their TFSA due to a change in their residential status and the pre-authorized transfer they set up before.
Zachary is a Canadian citizen who works in the US. He is deemed a non-resident and does not have any TFSA contribution room. However, when he first left for the US, he forgot to cancel the pre-authorized transfer to hisTFSA. Without his knowledge, the bank auto-deposited the set amount to his TFSA while he was ineligible, resulting in his overcontribution.
Beside negligence, the next-in-line most common cause of overcontribution is misunderstanding. Generally speaking, the annual contribution room is the amount you are allowed to put into your TFSA. But many of our clients we have come into contact with over a stretch of 15 years didn’t know that when they withdraw from their TFSA, the amount will also be added to their contribution room.
Lynn has the total TFSA contribution room of CAD 23,500, and the actual amount she has in her TFSA by the beginning of 2021 is CAD 16,500. She put in another 6000, which is the limit of 2021 set by the CRA. However, soon after she put in the money, she realized that she needed the cash flow for her online cookies business and withdrew 4,000. The 4000 she withdrew needs to be added to her room, causing overcontribution.
The penalty is 1% per month on the excess.
Like the CRA, we believe that any overcontribution is unintentionally done. Having said that, we do need you to provide us with all the accurate information up to date. Once we receive all the information we need, we will negotiate with the CRA on your behalf for waiver or reduction.